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Detroit's new bankruptcy plan lowers payouts

DETROIT — The city of Detroit on Monday proposed slightly lower payouts for some pensioners and unsecured bondholders as feverish negotiations continue in the largest municipal bankruptcy in U.S. history.

DETROIT — The city of Detroit on Monday proposed slightly lower payouts for some pensioners and unsecured bondholders as feverish negotiations continue in the largest municipal bankruptcy in U.S. history.

In an amended bankruptcy restructuring plan filed electronically in federal Bankruptcy Court in Detroit, the city maintained its previous proposal to invest $1.5 billion over 10 years to improve services while delivering steep cuts to unsecured creditors, including retirees and debt holders.

Among the biggest changes compared with a February version of the plan of adjustment and accompanying disclosure statement:

• The city said that police and fire retirees would get a 14% cut to their monthly pension checks if they reject the city's restructuring plan. The original figure was a 10% cut a month ago.

• The city proposed paying general obligation bondholders 15 cents on the dollar instead of 20 cents on the dollar.

• The revised plan also includes a proposal for the elimination of the current board of trustees for city's general retiree pension fund and the police and fire retirement fund.

• Fresh details about the city's reinvestment plans — including $78.7 million to hire civilian police employees so that officers can be redeployed, $25 million for a Department of Transportation security force and $90.6 million for software and servers to improve the city's dilapidated IT systems.

"The City continues to make progress with its creditors and retirees and hopes to reach agreement in the near term on a number of outstanding issues," Detroit emergency manager Kevyn Orr said in a statement. "We believe that the Plan we have proposed, and continue to refine, is feasible and allows the City to reduce its staggering $18 billion in debt and live within its means. The Plan puts the focus back on providing essential public services to the City's nearly 700,000 residents."

The city maintained its proposal of 26% cuts to monthly pension checks for general retirees if they vote in favor of the restructuring plan and 34% if they reject it. The city also maintained its proposal of 6% cuts to monthly pensions of police and fire retirees if they accept the restructuring plan.

The city also maintained its proposal of 6% cuts to monthly pensions of police and fire retirees if they accept the restructuring plan.(Photo: Eric Seals, Detroit Free Press)

But the city acknowledged that its proposal to cut annual cost-of-living adjustments to pensions increases the overall benefit cut to retirees. The loss of COLA represents an 18% benefit cut for police and fire retirees and a 13% cut for general retirees.

About 32,000 people receive pension checks from the city of Detroit, including about 22,000 retirees.

Orr proposed a new structure for the General Retirement System and Police and Fire, saying both are underfunded. That move is generally viewed as necessary before Republican state legislators agree to vote in favor of providing the city with $350 million toward the city's restructuring.

The new board would include five voting members with an annual stipend of $36,000 and two non-voting members and a CEO, according to the documents filed Monday. The five voting members must have financial expertise and cannot be employed by the city or be affiliated with any of its unions.

Tina Bassett, a spokeswoman for the city's general retirement pension board, said she hadn't reviewed the amended documents and couldn't comment extensively on them.

"We're still negotiating in good faith, and those numbers may not be the same numbers you see at the end of the deal," said Bassett.

Bruce Babiarz, a spokesman for the police and fire pension board, also said the pension fund needed more time to review the amended plan of adjustment, but said the "POA," or plan of adjustment, is still "DOA."

While the police and fire pension plan remains "committed to negotiating in good faith toward a consensual agreement," Babiarz said, "pushing a POA with continued blanks is an affront to good-faith negotiations and the court-ordered mediation process."

Orr has argued that significant cuts are necessary to improve public safety and restore basic services for the city.

But creditors, including major financial investors and the city's retirees, have fiercely objected to the plan of adjustment, saying the cuts are too steep.

In the new documents filed Monday, the city also included details of a proposed settlement with UBS and Bank of America Merrill Lynch, which would collectively receive $85 million to eliminate a $288-million financial obligation called swaps.

That deal would eliminate a disastrous pension debt-interest-rate bet brokered by Mayor Kwame Kilpatrick's administration in 2005 to secure a steady interest rate of 6% on a $1.4 billion borrowing transaction.

Several major creditors have objected to the proposed swaps settlement.

U.S. Bankruptcy Judge Steven Rhodes will determine the fate of Orr's updated proposed restructuring plan. In a hearing currently scheduled for April 14, Rhodes will decide whether the disclosure statement contains enough information about the city's plans.

In a trial currently expected to start July 16, Rhodes will hear arguments and weigh evidence about whether the city's restructuring plan is feasible.

Creditors, including retirees, will get a chance to vote on the plan of adjustment. To implement the plan, the city must get a majority of creditors representing two-thirds of the city's debt to vote yes. Alternatively, however, the city could pursue a forcible restructuring plan in a legal process called a "cram down," which would allow Rhodes to implement debt cuts over the objections of creditors.

In a statement Monday, the city said it plans to file additional amendments to the restructuring plan before April 14.

Among the new documents filed Monday is one outlining the principal terms of the Detroit Institute of Arts settlement. It sets out the funding formula that includes $366 million from foundations and the museum pledge to raise an additional $100 million.

Orr has said he wants to avoid selling art. Instead, he has proposed accepting $816 million in non-profit foundation donations, the state of Michigan and Detroit Institute of Arts pledges to reduce pension cuts and allow the museum to be transferred to a non-profit. State lawmakers have yet to approve the funding, in part because retirees haven't agreed to accept the offer.

But pensioners would have to vote for the deal, referred to by some as the "grand bargain," and would have to give up their right to sue the state of Michigan over pension cuts.